Tax on cash flow ..

topcat

Hi,

I can see where the figure is coming for tax but i have no idea why you do it?

If anyone could explain the theory that would be great please:

CeeJaySix

Because your starting figure (profit from operations) is before tax; therefore until you adjust for it, there is no accounting for the cash used to pay last year's tax. If you started from the profit from continuing operations it would be a different adjustment, as the tax charged to the P&L in the current year is included in that figure (the cash movement is in relation to the prior year's liaibility though, so you would still need to make an adjustment for the difference between the current year charge and prior year charge).

crispy

Hi,
At the time the year end financial statements are preapred an estimate (provision) is made for the Tax charge for the year, which may end up being different to the actual Tax paid. This is illustrated above as the Y/e 20X0 shows a liabiltity C/f of 3,180 however the cash flow works out as 3,102 as being paid for the year.

It is possible that under or over provisions are made for the Tax charge.

topcat

CeeJaySix wrote: »

Because your starting figure (profit from operations) is before tax; therefore until you adjust for it, there is no accounting for the cash used to pay last year's tax. If you started from the profit from continuing operations it would be a different adjustment, as the tax charged to the P&L in the current year is included in that figure (the cash movement is in relation to the prior year's liaibility though, so you would still need to make an adjustment for the difference between the current year charge and prior year charge).

Thanks ceejay that has helped me understand a bit more.

What i am still a bit confused about though is the £3180 in SOFP is last years estimated tax .

The tax of £2712 in P+L is this years tax with any under /over estimations included.

But i am not sure why i am comparing estimated tax with estimated tax in the SOFP and then taking the difference?

Sorry just carnt get my mind to understand it

I might read your post again later and hopefully something will click :001_smile:

crispy

Hello,
It looks like there was an over-provision for the Y/e 20X0 of 78 so therefore....

Profit & Loss Y/e 30/6/01 extract:

Over Provision B/F: (78)
Estimate charge for Y/e 30/6/01: 2,790
Tax Charge: 2,712

Tax Paid for 30/6/01:

Tax Liability B/F: 3,180
Charge for the Yr: 2,712 (as above)
Tax Liability C/F: (2,790) (the estimate for current Yr)

Tax Paid: 3,102 (balancing figure)

Lucy_M

I don't know about Topcat but that's helped me loads, thanks; tax is one thing I struggle with! :thumbup1:

topcat

crispy wrote: »

Hello,
It looks like there was an over-provision for the Y/e 20X0 of 78 so therefore....

Profit & Loss Y/e 30/6/01 extract:

Over Provision B/F: (78)
Estimate charge for Y/e 30/6/01: 2,790
Tax Charge: 2,712

Tax Paid for 30/6/01:

Tax Liability B/F: 3,180
Charge for the Yr: 2,712 (as above)
Tax Liability C/F: (2,790) (the estimate for current Yr)

Tax Paid: 3,102 (balancing figure)

Hi Crispy

thank you very much for your further explanation much appreciated.

I am still not 100% sure on it but my exam is tomorrow so will just hope for the best at this stage :001_smile:

Lucy_M

Good luck for tomorrow topcat! I find out if I passed tomorrow... I'm so nervous :sad:

Lucy_M

YES!!!! Just looked (result wasn't up at 4pm..!) and I've passed Financial Statements!!

CeeJaySix

Ah sorry Topcat, when you said you could see where the figure had come from I assumed you knew how/why it was calculated and just didn't understand why it was needed in the cashflow rec.

Crispy is absolutely on the money, I will try and explain it in a slightly different way to see if we can help you get it sussed (you can almost guarantee it will be on the exam).

Lets start with a figure brought forward that agrees to what was paid for the year ending 2009. Let's assume that the year ending 2009 was the first year of trading, and therefore there was no tax payable for 2008.

The tax is calculated at £2000. This is debited to the income statement and credited to the SoFP in the year-end accounts. This is because, although it has not been paid yet, it is a charge relating to the current period - effectively it is an accrual. There is no effect on the cashflow rec, as tax is not included in the operating profit figure, and no cash has changed hands.

Now into the year ending 2010. At some point during this year, the tax due for 2009, £2000, is actually paid. This would credit bank, debit the corporation tax control account (SoFP), returning that account to nil (cancels out our accrual). In the cashflow rec for 2010, an adjustment would have to be made for this £2000 payment, as it is not included in the operating profit, but £2000 has gone out. At the year end, the tax due for 2010 is calculated at £3180, and this is charged to the income statement, with the corresponding creditor in the SoFP (as you can see in the 2010 column in the question).

Now comes the tricky part. We are looking at the year ending 2011, and we need to know how much tax was physically paid during the year (what tax relating to 2010 was paid to HMRC) in order to make our cashflow rec work. We know that this isn't just the full amount calculated at the last year end, because in the current year accounts we can see the tax charged to the income statement is not the same as the amount that is in the liability account on the SoFP.

We know that the estimated tax for 2011 is £2790, as that is what has been accrued for, to be paid over to HMRC in the next period. However we can also see that only £2712 of this has been charged to the income statement, so we know that there must have been some left in the liability account (SoFP) after the tax for 2010 was physically paid. £2790 - £2712 = £78 was left over out of the accrual for the previous year. That means that in the current year, we must only have paid £3180 (that we estimated at the last year end and accrued for) - £72 = £3102 actual cash paid. Therefore this is the figure for the cashflow statement.

You just have to remember that the number in the SoFP is the total estimate for the current year; the tax actually paid over was for the prior year. So to work out what that was, you take away the amount charged to the income statement in the current year from the balance on the liability account, then subtract this difference from the balance on the liability account at the previous year end. Just make sure you get it the right way round if it's been under-accrued or over-accrued in the current year!

It's easy enough once you get your head round it - did that make it any clearer?

topcat

CeeJaySix wrote: »

Ah sorry Topcat, when you said you could see where the figure had come from I assumed you knew how/why it was calculated and just didn't understand why it was needed in the cashflow rec.

Crispy is absolutely on the money, I will try and explain it in a slightly different way to see if we can help you get it sussed (you can almost guarantee it will be on the exam).

Lets start with a figure brought forward that agrees to what was paid for the year ending 2009. Let's assume that the year ending 2009 was the first year of trading, and therefore there was no tax payable for 2008.

The tax is calculated at £2000. This is debited to the income statement and credited to the SoFP in the year-end accounts. This is because, although it has not been paid yet, it is a charge relating to the current period - effectively it is an accrual. There is no effect on the cashflow rec, as tax is not included in the operating profit figure, and no cash has changed hands.

Now into the year ending 2010. At some point during this year, the tax due for 2009, £2000, is actually paid. This would credit bank, debit the corporation tax control account (SoFP), returning that account to nil (cancels out our accrual). In the cashflow rec for 2010, an adjustment would have to be made for this £2000 payment, as it is not included in the operating profit, but £2000 has gone out. At the year end, the tax due for 2010 is calculated at £3180, and this is charged to the income statement, with the corresponding creditor in the SoFP (as you can see in the 2010 column in the question).

Now comes the tricky part. We are looking at the year ending 2011, and we need to know how much tax was physically paid during the year (what tax relating to 2010 was paid to HMRC) in order to make our cashflow rec work. We know that this isn't just the full amount calculated at the last year end, because in the current year accounts we can see the tax charged to the income statement is not the same as the amount that is in the liability account on the SoFP.

We know that the estimated tax for 2011 is £2790, as that is what has been accrued for, to be paid over to HMRC in the next period. However we can also see that only £2712 of this has been charged to the income statement, so we know that there must have been some left in the liability account (SoFP) after the tax for 2010 was physically paid. £2790 - £2712 = £78 was left over out of the accrual for the previous year. That means that in the current year, we must only have paid £3180 (that we estimated at the last year end and accrued for) - £72 = £3102 actual cash paid. Therefore this is the figure for the cashflow statement.

You just have to remember that the number in the SoFP is the total estimate for the current year; the tax actually paid over was for the prior year. So to work out what that was, you take away the amount charged to the income statement in the current year from the balance on the liability account, then subtract this difference from the balance on the liability account at the previous year end. Just make sure you get it the right way round if it's been under-accrued or over-accrued in the current year!

It's easy enough once you get your head round it - did that make it any clearer?

Not to worry ceejay i thought i did know but i didnt when it got down to it

Thank you very much for your patience and taking the great amount of time + effort to write out that great explanation it has really helped, 99% confident i understand now

This might be the point that tips me over to passing

Thank you again

topcat

delete

topcat

Lucy_M wrote: »

YES!!!! Just looked (result wasn't up at 4pm..!) and I've passed Financial Statements!!

Thank you i need all the luck i can get for this one !

Very well done that is fantastic!!!!!!!, make sure you celebrate well deserved

Lucy_M

If you look before your exam then my one piece of advice is don't panic if it doesn't balance, my first one didn't!

Thank you and good luck again!!